Fortnightly - Power purchase agreementshttps://www.fortnightly.com/tags/power-purchase-agreements
enSolar Emergencehttps://www.fortnightly.com/fortnightly/2011/03/solar-emergence
<div class="field field-name-field-import-deck field-type-text-long field-label-inline clearfix"><div class="field-label">Deck:&nbsp;</div><div class="field-items"><div class="field-item even"><p>Models are evolving for utility-scale solar development.</p>
</div></div></div><div class="field field-name-field-import-byline field-type-text-long field-label-inline clearfix"><div class="field-label">Byline:&nbsp;</div><div class="field-items"><div class="field-item even"><p>Kate Bechen</p>
</div></div></div><div class="field field-name-field-import-category field-type-text field-label-inline clearfix"><div class="field-label">Category:&nbsp;</div><div class="field-items"><div class="field-item even">Business &amp; Money</div></div></div><div class="field field-name-field-import-bio field-type-text-long field-label-inline clearfix"><div class="field-label">Author Bio:&nbsp;</div><div class="field-items"><div class="field-item even"><p><b>Kate Bechen</b> is an attorney and member of the energy and sustainability industry group at Michael Best &amp; Friedrich LLP. Email her at <a href="mailto:klbechen@michaelbest.com">klbechen@michaelbest.com</a>.</p>
</div></div></div><div class="field field-name-field-import-volume field-type-node-reference field-label-inline clearfix"><div class="field-label">Magazine Volume:&nbsp;</div><div class="field-items"><div class="field-item even">Fortnightly Magazine - March 2011</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"><p>Each year U.S. demand for solar energy increases, even during the recent recession. Demand comes from all sectors: residential markets, driven by residential users’ interest in going green and the availability of residential tax credits; as well as commercial-scale and utility-scale green energy programs.</p>
<p>The residential market is expected to continue increasing, especially as new financing models become more common. For example, leases and power purchase agreements allow residential consumers to consume solar energy without the large up-front costs associated with installing a solar array. Obviously, this type of financing model requires the residential consumer’s utility to offer such options, but some markets are seeing demand for such arrangements. Further, technological development in the portability of solar arrays would allow homeowners to move their PV panels with them to a new home when relocating. This would give owners greater confidence that they’d be able to gain the full value from their investments, even if they sell their home to a buyer who doesn’t value solar energy as highly as they do.</p>
<p>Commercial-scale projects are becoming increasingly common as businesses strive to appear more socially responsible by building or retrofitting existing structures with green technology, including solar panels. More business are also pursing LEED certification and scoring points through the installation of solar panels on buildings and parking structures.</p>
<p>But the real growth over the next few years will most likely be in utility-scale solar projects, largely due to state mandated renewable portfolio standards (RPS). With the tight financing market, project developers are struggling to meet demand from utility companies, which are required to meet state RPS policies <i>(see “Solar Power and State Mandates”)</i>. As utility-scale projects expand, they face numerous obstacles, including complexities in project financing, state and federal funding sources, and debt and private equity.</p>
<h4>Green Project Finance</h4>
<p>The demand for utility-scale solar power projects has resulted in a fair number of projects entering the development phase. According to the Solar Energy Industries Association, utility-scale projects currently under development total 23,488 MW—including both photovoltaic (PV) and thermal concentrated solar power (CSP). When compared to the 666 MW in operation and the 712 MW under construction, one might say that the future of utility-scale projects looks bright. But that isn’t the entire picture. Large-scale projects cost large amounts of money, and financing, whether from the debt or equity markets, is hard to come by as the economy recovers.</p>
<p>The installed cost of solar—PV and CSP—has decreased significantly over the last decade. That alone has proved insufficient. It’s the government incentives that make these projects attractive to developers, investors and lenders. Recent research in the U.S. and abroad reach the same conclusion: solar projects that don’t receive government subsidies are unable to compete with combined-cycle gas turbine (CCGT) plants.</p>
<p>In the U.S., government funding comes in the form of tax incentives, grants, loan guarantees and accelerated depreciation. Investment tax credits and new market tax credits encourage tax credit equity financing where investors invest in a project in exchange for the tax credits received by the project. The tax credits are then used to offset the non-project related income of the tax credit investor.</p>
<p>State programs such as RPS policies and feed-in tariffs also assist the development of the solar market. Tax-exempt bonds are issued by a municipality with interest that isn’t subject to federal taxation and, sometimes, state taxation. Tax-credit bonds allow the bond holder to claim a federal tax credit rather than receive tax-exempt interest.</p>
<p>Many programs offer loans and grants using federal stimulus money. Some such programs have been so popular that they’re oversubscribed. Some states have adopted feed-in tariffs, although the target is mostly smaller-scale residential load projects. Power purchase agreements (PPA) allow agencies, companies and individuals to purchase solar energy from a private solar company, similar to purchasing from a utility.</p>
<p>While understanding and taking advantage of government incentives is crucial, developers of solar projects understand that a long-term PPA is essential to procuring financing for any project. An interconnection agreement, construction permit and favorable internal rate of return (IRR) are also key to getting any solar project financed. Lenders typically expect certain terms and conditions in a PPA and interconnection agreement, such as assignment clauses that favor the lender. The amount of negotiation room in a PPA can differ drastically. Usually the utility has a form PPA that’s provided to all solar project developers. Often the terms differ depending upon the size of the project. Residential-scale projects might simply lack the bargaining power to demand anything but the standard terms, while larger-scale projects might have more success in negotiating price escalators and other developer-favorable terms.</p>
<p>Even with a PPA in place, developers face an uphill battle in securing funding. The pool of tax credit investors has been reduced as a result of the recession and thus the need to reduce tax liabilities. Private equity investors are still investing in solar projects, although the recent trend has been investments in larger developers and portfolios, rather than individual projects, which can make financing more difficult for smaller-scale developers. Further, we are seeing a trend toward tried and true technology and reluctance from investors when it comes to cutting-edge technology, although this is most true for debt financing. Debt markets are even more difficult. Lenders have significantly curtailed lending to projects of the size of utility-scale solar arrays, and, similar to equity investors, often give lukewarm receptions to cutting-edge technology. CSP projects need to be very large, typically a few hundred MWs, in order to be economically feasible. Securing debt financing for such a large project is typically more difficult than for a solar PV project. Tight financing has pushed utilities to adopt ownership models that give utilities control over electricity production as well as the tax benefits that accompany projects.</p>
<p>California, a state with an RPS that required utilities to purchase 20 percent of their electricity from renewable sources by 2010 (although compliance was pushed back until 2013), has demonstrated that it can work with private developers and the federal government to develop utility-scale projects. In late 2010, six utility-scale projects received fast-track approval. The projects will be built by private developers on public land, for a combined output of 2.8 GW. The projects will receive stimulus funding and also qualify for investment tax credits.</p>
<h4>Solar Business Models</h4>
<p>So what should be the role of the government in developing the solar energy market? Certainly RPS policies with solar carve-outs and state feed-in tariffs pressure utilities to purchase solar power. Stimulus money and tax credits also make solar projects more attractive to investors. If renewable energy credits were more valuable, if gas prices were higher (for a sustained amount of time) or if gas powered plants were required to purchase carbon credits, the gap between gas and solar would close. But, on the other side of the coin, if private industry were able to produce a more efficient, less costly, mobile solar array, the cost discrepancy would decrease as well.</p>
<p>While solar hardware has come a long way to be more efficient, reliable and cheaper, there isn’t as much focus on the soft costs associated with solar installations. While many incentives are available, there’s a lack of standardization in the process of locating and applying for the incentives. Further, the process is slow and document-intense, often necessitating redundant data entry. Permitting is a significant challenge to any solar project. Federal, state, county and local government authorities have jurisdiction over solar projects, which can create a permitting nightmare.</p>
<p>Even once the solar project has secured its appropriate permits, interconnection can also be an issue depending on the proximity of the project to transmission lines. There is little standardization across utility companies. Some offer a straightforward interconnection process while others, due to size, resources or lack of demand, have a cumbersome, nontransparent process.</p>
<p>Finally, companies in the solar industry need to assess whether smaller, specialized operations or vertical integration provides the greatest cost savings. Vertical integration would lend itself to utility-scale projects because the developer would manufacture and own the solar array, perhaps even design and build it as well. Specialization, with companies doing what they do best, would likely have less of a focus on utility-scale projects due to their sheer size and cost. Addressing these industry-wide soft costs could result in a material decrease in the cost of solar energy.</p>
<p>Some countries (China is a recent example) have taken steps to demonstrate that government funding should lead the development of the solar energy market. In August 2010, 13 new utility-scale solar projects were put up for bid. Seventy percent of the winning bids went to government-controlled enterprises. The bids ranged from $0.10 to $0.15 per kWh. While these rates may be adjusted depending on many factors, the projects aren’t expected to be profitable for 17 to 18 years. With this type of ROI, it’s no wonder that the winning bids went to state-controlled enterprises. Irrespective of opinions on direct state involvement, China will have significant utility-scale solar projects in the very near future—especially impressive considering that China’s first utility-scale solar project, which was put out for bids in 2009, hasn’t finished construction.</p>
<p>India may very well become a world leader as it creates one of the largest markets for CSP and, in contrast to China, the growth is largely driven by private entrepreneurship. The government recently announced that its solar energy goal is to generate 20 GW by 2022, of which 50 percent will be CSP. Both large and small companies are getting involved in CSP, learning the technology, developing working partnerships with the right companies and successfully driving down costs. With a strong economy, a large population and dedicated entrepreneurs, India may provide the strongest case for private development of the solar industry.</p>
<p>Europe has successfully created a large solar market through the use of feed-in tariffs. Feed-in tariffs involve three key provisions. First, producers are guaranteed grid access for any power they choose to sell. Second, the utility is obligated to purchase the electricity pursuant to a long-term contract. Finally, the purchase price is set by the government and is methodologically based on the cost of the energy generation.</p>
<p>Opponents of feed-in tariffs argue that competitive bidding rather than government involvement in pricing would lead to more cost effective projects. Feed-in tariffs are utilized in the U.S., but typically state feed-in tariffs only apply for small-scale producers. Ontario established a strong feed-in tariff program in 2009 and revised it further in 2010. Along with controlling the price, Ontario requires a certain percentage of the services and equipment to come from Ontario-based companies. The result has been a boom in solar projects.</p>
<p>Perhaps a common ground between direct government funding (such as the China example) or pure private research and development is the recently announced Department of Energy Solar Demonstration Zone project. In an effort to develop cost-competitive solar technologies, DOE announced that it will fund $50 million in testing and demonstration efforts. The focus is on cutting-edge solar technologies and the goal is to deploy the technology at such a scale (utility-scale projects larger than 20 MW) so as to provide meaningful operating and economic data. This DOE project is in its very early stages, so it’s hard to determine what impact it and similar initiatives might have on the development of the industry.</p>
<h4>Incentive Market</h4>
<p>Solar power has come a long way. Technological advancements have significantly decreased the installed costs of solar arrays. Tax credits and alternative financing models are encouraging the further development of residential-scale projects. Commercial-scale projects are being pursued by businesses looking to green-up their image. State RPS policies are creating a market for utility-scale projects. But, at least for today, solar projects must rely heavily on government-created incentives.</p>
<p>Tax credits, stimulus funding, grants, loan guarantees and accelerated depreciation all add to the attractiveness of a solar project, to the extent that projects that don’t rely on government incentives aren’t competitive with CCGT plants. With more states adopting new RPS policies and expanding existing ones, the need for solar projects likely won’t decrease. But, for the present, developers must rely upon government incentives to entice investor and lender interest, especially as the country emerges from a recession and financing markets remain tight.</p>
</div></div></div><div class="field-collection-container clearfix"><div class="field field-name-field-sidebar field-type-field-collection field-label-above"><div class="field-label">Sidebar:&nbsp;</div><div class="field-items"><div class="field-item even"><div class="field-collection-view clearfix view-mode-full field-collection-view-final"><div class="entity entity-field-collection-item field-collection-item-field-sidebar clearfix">
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<div class="field field-name-field-sidebar-title field-type-text field-label-above"><div class="field-label">Sidebar Title:&nbsp;</div><div class="field-items"><div class="field-item even">&lt;b&gt;Solar Power and State Mandates &lt;/b&gt;</div></div></div><div class="field field-name-field-sidebar-body field-type-text-long field-label-above"><div class="field-label">Sidebar Body:&nbsp;</div><div class="field-items"><div class="field-item even"><!--smart_paging_autop_filter--><!--smart_paging_filter--><p>At the utility-scale level, California represents the dominant solar-energy market, followed by Arizona, Colorado and New Jersey.</p><p>Thanks to state-driven energy independence initiatives, some states with large solar projects are somewhat counterintuitive. For example, 10 northeastern and Mid-Atlantic states formed an alliance with the goal to cut carbon dioxide emissions from power production by 10 percent by 2018. Typically one wouldn’t view northeastern states as solar leaders, but New Jersey in fact has the fastest growing utility-scale solar market in the U.S. In the South, where one would expect to see significant solar projects and a more developed market for solar energy, only Florida, North Carolina and Texas have meaningful projects underway.</p><p>In many states the demand and market for solar energy is minimal to nonexistent, largely due to climate issues, underdeveloped grid interconnection and infrastructure, low consumer demand and the lack of solar-specific RPS. Twenty-nine states plus the District of Columbia have adopted mandatory RPS policies<sup>1</sup> and seven additional states have adopted non-binding goals.<sup><span style="vertical-align: super; ">2</span></sup></p><p>Approximately a dozen states have RPS policies with solar carve-outs or multipliers. Federal, state and local solar-specific RFPs are also becoming more common as stimulus funding is being used and government-driven energy independence initiatives are being expanded. Utilities are beginning to realize they can’t meet RPS or be competitive for certain RFPs by relying solely on commercial and residential-scale projects alone. As a result, utility-scale projects are arguably the fastest growing segment in the solar market.–KB</p><p> </p><h4><span>Endnotes: </span></h4><p><span>1. Arizona, California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, Texas, Washington, Washington, D.C., Wisconsin.</span></p><p><span>2. North Dakota, Oklahoma, South Dakota, Utah, Vermont, Virginia, West Virginia.</span></p></div></div></div> </div>
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</div></div></div></div></div><div class="field field-name-field-article-category field-type-taxonomy-term-reference field-label-above clearfix"><h3 class="field-label">Category (Actual): </h3><ul class="links"><li class="taxonomy-term-reference-0"><a href="/article-categories/renewables-solar-11505">Solar</a></li><li class="taxonomy-term-reference-1"><a href="/article-categories/strategy-planning">Strategy &amp; Planning</a></li><li class="taxonomy-term-reference-2"><a href="/article-categories/states">The States</a></li></ul></div><div class="field field-name-field-members-only field-type-list-boolean field-label-above"><div class="field-label">Viewable to All?:&nbsp;</div><div class="field-items"><div class="field-item even"></div></div></div><div class="field field-name-field-article-featured field-type-list-boolean field-label-above"><div class="field-label">Is Featured?:&nbsp;</div><div class="field-items"><div class="field-item even"></div></div></div><div class="field field-name-field-department field-type-taxonomy-term-reference field-label-above clearfix"><h3 class="field-label">Department: </h3><ul class="links"><li class="taxonomy-term-reference-0"><a href="/department/business-money">Business &amp; Money</a></li></ul></div><div class="field field-name-field-image-picture field-type-image field-label-above"><div class="field-label">Image Picture:&nbsp;</div><div class="field-items"><div class="field-item even"><img src="https://www.fortnightly.com/sites/default/files/article_images/1103/images/1103-BIZ.jpg" width="1214" height="1500" alt="" /></div></div></div><div class="field field-name-field-fortnightly-40 field-type-list-boolean field-label-above"><div class="field-label">Is Fortnightly 40?:&nbsp;</div><div class="field-items"><div class="field-item even"></div></div></div><div class="field field-name-field-law-lawyers field-type-list-boolean field-label-above"><div class="field-label">Is Law &amp; Lawyers:&nbsp;</div><div class="field-items"><div class="field-item even"></div></div></div><div class="field field-name-field-tags field-type-taxonomy-term-reference field-label-above clearfix">
<div class="field-label">Tags:&nbsp;</div>
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<a href="/tags/ccgt">CCGT</a><span class="pur_comma">, </span><a href="/tags/china">China</a><span class="pur_comma">, </span><a href="/tags/commercial-scale">Commercial-scale</a><span class="pur_comma">, </span><a href="/tags/csp">CSP</a><span class="pur_comma">, </span><a href="/tags/debt-markets">Debt markets</a><span class="pur_comma">, </span><a href="/tags/department-energy">Department of Energy</a><span class="pur_comma">, </span><a href="/tags/doe">DOE</a><span class="pur_comma">, </span><a href="/tags/feed-tariffs">Feed-in tariffs</a><span class="pur_comma">, </span><a href="/tags/finance">Finance</a><span class="pur_comma">, </span><a href="/tags/investment-tax-credit">Investment tax credit</a><span class="pur_comma">, </span><a href="/tags/investment-tax-credits">Investment tax credits</a><span class="pur_comma">, </span><a href="/tags/irr">IRR</a><span class="pur_comma">, </span><a href="/tags/large-scale-projects">Large-scale projects</a><span class="pur_comma">, </span><a href="/tags/leed-certification">LEED certification</a><span class="pur_comma">, </span><a href="/tags/mandates">Mandates</a><span class="pur_comma">, </span><a href="/tags/permitting">Permitting</a><span class="pur_comma">, </span><a href="/tags/power-purchase-agreement">Power purchase agreement</a><span class="pur_comma">, </span><a href="/tags/power-purchase-agreements">Power purchase agreements</a><span class="pur_comma">, </span><a href="/tags/power-purchase-agreements-ppa">Power purchase agreements (PPA)</a><span class="pur_comma">, </span><a href="/tags/ppa">PPA</a><span class="pur_comma">, </span><a href="/tags/pv">PV</a><span class="pur_comma">, </span><a href="/tags/rps">RPS</a><span class="pur_comma">, </span><a href="/tags/solar">Solar</a><span class="pur_comma">, </span><a href="/tags/solar-energy-industries-association">Solar Energy Industries Association</a><span class="pur_comma">, </span><a href="/tags/solar-panels">solar panels</a><span class="pur_comma">, </span><a href="/tags/solar-power">Solar power</a><span class="pur_comma">, </span><a href="/tags/tax-credits">Tax credits</a><span class="pur_comma">, </span><a href="/tags/tax-exempt-bonds">Tax-exempt bonds</a><span class="pur_comma">, </span><a href="/tags/vertical-integration">Vertical integration</a> </div>
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Tue, 01 Mar 2011 05:00:00 +0000puradmin14117 at https://www.fortnightly.com